Do political connections affect the conservative financial reporting of family firms?

Abstract

This paper investigates the effect of political connections on the association between family firms and conservative financial reporting. While family firms have incentives to reduce agency and litigation-related costs by means of conservative reporting, firms with political connections tend to have opaque financial reporting, which enable them to engage in rent-seeking activities. Using data for Taiwanese listed firms between 1996 and 2012, the final sample observations were 13,877 firm-year observations from a population of 21,393 firm-year observations. We found that political connections weaken the positive relationship between family ownership and conservative financial reporting. This suggests that politically connected family firms make fewer demands for conservative financial reporting. This study contributes to the literature on how political connections affect the family owners' reporting incentives. Policy makers may consider political connections as an essential factor with respect to establishing governance practice in family firms.